: 4 financial-planning rules the world has forgotten

The simplest rules sometimes get lost in the world of online banking, instant investing and fast moving everything. You may have forgotten four tried and true financial planning basics in this 21st century or worse, considered old fashioned.

In the low interest rate environment, many people felt they were wasting money or “were losing money” by keeping cash in a bank. Making money seemed to be the goal rather than maintaining their current life if an upending event like job loss or injury arrived. Money in the bank does not lose value, unlike some money-market funds that did during the Great Recession. A dollar is always a dollar and thanks to Federal Deposit Insurance (FDIC) that money stays in place even if the bank goes kaput. That is why a safety account is best kept at the bank.

Read: Don’t have a budget? It’s never too late to get started.

A safety account at a second bank is even better. This way you protect yourself in two ways. First, this back up money is more difficult to transfer to your checking that you use for everyday occurrences. Second, you are protecting yourself by having a source of funds if your main bank does need a bailout from the FDIC. You always have money. Having more than one financial institution makes sense. Many of us may not have more than $250,000 in the bank but the principal applies. We do not know what bank may fail. The average customer is not privy to that information.  

With the savings rate dropping and the credit card debt increasing, your grandmother who had her bank for everyday checking and credit union account for a rainy day is looking brilliant. She most likely had cash at home too—for everyday needs. She could not spend more than she had. She had a back up plan.

Read: Banksunder pressure: How to maximize your FDIC protection

 Keep less than 10 % of company stock in the company you work for — whether it is in your 401(k) or held separately

When you are “in the know” and watch your company stock go up and up over months or years, you want in. Whether you can invest in your company retirement plan or get stock options or participate in a stock purchase plan at a deep discount, the conversations and excitement make you feel like you can only make money. 

Do not let your emotions sideline solid financial planning. If your job is with a firm, and your investments are with the same firm. You are ignoring the main tenet of investing: Diversify. 

At a dinner party recently, someone mentioned that when Enron went under, people lost their 401(k)s. There is more to that story. The loss was not simply a result of Enron’s bankruptcy, but rather poor investment strategy on the employee’s part. Many of them were invested in Enron stock. Too many were invested only in Enron stock.

For those working at Lucid Group

or First Republic
for example, if all or most of your 401(k) is in company stock, this past year you have seen a dramatic decrease in your account. 

Despite the S&P 500

being down in the past year, in many cases investing in a mix of stocks and bonds offsets the market trend. 

You have choices. In an environment where Tesla declined over 60% in 2022, a job and an abundance of company stock with that company would wreak havoc on anyone’s finances—not to mention psyche. Diversify.

Read: Tesla is now worth less than Exxon as stock plunges toward worst month, quarter and year in history 

A paid-off mortgage is the best security

We all must have somewhere to live. The best way to reduce our costs and prepare for retirement is to have a home that is fully owned by us. When a home is paid off there is a sense of security that cannot be beat. In addition, whether interest rates rise, or fall is irrelevant. You are not in debt and have one less bill to pay. Sure, there’s still home insurance and real estate taxes; however, that is all you have to pay. If the economy tanks and you lose your job, you need a minimal amount to get by because your housing costs are significantly reduced. 

When you retire, you need less income to sustain your quality of life, and by taking less from your retirement accounts, your income taxes are lower. This allows you more income to spend on what you want and when you want rather than being beholden to make the mortgage payment to the bank.

Using someone else’s money is a theory I have heard repeatedly on the street from others. However, what is good for a business strategy is not appropriate on a personal level. Own your home and gain control of your life.

Stay out of short-term debt

Short-term debt is usually for the things we own that lose value: car, clothes, housewares not to mention the less tangible things like dinner out, drinks and entertainment. And to me, car loans are short term debt — OK, medium-term debt — but still paying interest and paying for something you cannot afford to buy outright is a waste of money. Your hard-earned money.

Getting long-term loans for an increasing asset like a home is building your assets and improving your net worth. Spending and using debt for declining assets is spoiling your balance sheet, so much so that your future long-term home purchases could be in jeopardy. Mortgage companies and banks look at your other debt to assess their credit risk. Too much debt based on your income could rule you out of the housing market. Or it is likely to increase the interest you pay on a car loan because you carry a large debt load.

With credit cards interest rates hovering around 20%, all consumers in debt are getting a double whammy: carrying short-term debt and paying exorbitant interest. For now, stay out of debt.

With inflation, we all are being stretched. This is the time to make hard choices. Do your finances a bit differently to protect yourself from rising interest rates. Perhaps you could live without a credit card for a month? Or if not, pay it off each time you use it. This way you are using mindful spending and only spending the money you have.    

Live in the present. Practice the basic sound financial principles. Grandmother may have been on to something.

CD Moriarty, CFP, is a Vermont-based financial speaker, writer and coach.

April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.


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